McGlone (cont'd.): The last time the Fed started a tightening cycle was June 30, 2004, when the Fed funds were about 1 percent. At that time, the consumer price index (CPI) was 3.3 percent. Currently, CPI is below 2 percent.
What investors need to be concerned about when investing in precious metals is the potential Fed tightening in the near future. Just ask yourself the question, If and when the Fed is going to tighten, what is the landscape going to look like?
HAI: In 2004, when that last “tightening” occurred, unemployment was at 5.6 percent. How far off that mark are we?
McGlone: At the current pace of the drop in unemployment, it might not happen until 2016, depending on what measure you use. However, we did a little research, and if we stay at the current pace of the drop in unemployment, that’s something to look forward to.
As far as looking way out on the curve, it might be a long time before we see any type of real constraint from our Federal Reserve. But during that period, what are we supposed to do? What should we expect? We should get a decent pickup in CPI.
HAI: What does it mean for investors if the CPI doesn’t increase?
McGlone: Overall, it can build quite a few more bullish scenarios for the precious metals, certainly gold and silver, for a stored value in an environment in which we’ve recently had a pretty substantial correction. Our advice is that correction was within the bullish trend, which is really being supported by the same things that supported it earlier.
HAI: What brought the gold market to the unprecedented highs of two years ago?
McGlone: Sovereign debt issues got the market to those highs. The Fed and the S&P downgraded U.S. debt just four days after Congress signed the Budget Control Act in August 2011.
Then, a month later, gold prices reached a new high. During that whole period, we had major sovereign debt issues in Europe; Greece and Ireland, but also Spain and Italy, were on the issue of potentially being too big to bail out.
That’s another key thing people have to keep in mind: What is this trend in global sovereign debt? We all know what's coming up at the end of October, according to the Treasury Secretary. The U.S. government is going to meet its budget ceiling.
HAI: Do you think ETPs help to drive precious metal prices at all?
McGlone: The total holdings of ETPs in gold and silver account for about three-quarters of annual supply. For instance, in silver, the total holdings are 645 million ounces, and total annual supply in silver is around 800 million ounces. Gold ETF holdings are around 62 million ounces, and total annual supply of gold for miners is about 90 million ounces.
When you take a physical commodity off the market initially and put it away in an ETF, it will reduce supply and have a certain bullish impact on price. A key thing to point out is that’s also going to have a bearish impact later, which is what happened this year in gold.